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P Y THIS BOOK A
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O
ABOUT

C E D
H T I A L
I G E R
A picture is worth a thousand words.

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P Y AT
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M
his book was born from the idea that life can be made simpler

O
and time can be used more wisely. As Leonardo da Vinci once

C D
said, “Simplicity is the ultimate sophistication.”

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With specific reference to trading and investing, candlestick

T A
trading and chart reading can be made simpler, easier to analyze,

H I
and used for better decisions. And these are the objectives of this

I G R
first book on the subject of heikin-ashi.

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Many people use traditional Japanese candlesticks. Thousands

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of books and software packages are available on the subject, and

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one can find courses, seminars, and webinars about this visual

O M
representation everywhere in the world. The same could be

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said about the number of newsletters and websites that discuss

D
candlesticks and identify and recommend reversal or continuation

T E
patterns. Cheat sheets, like the ones we may have used in school,

H L
have been developed to help people memorize candlestick patterns.

A
Japanese candlestick patterns are very popular today. They have

I G I
very flexible rules and interpretations “in the context.” Everyone

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translates them, more or less, in a subjective manner. My personal

Y E
interpretations may be different from yours, the reader, or from

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that of the top experts in this field. These facts lead to the reality

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that candlestick patterns are subjective, artistic, and challenging,

E
so traders need a more objective, quantifiable tool. And this is the

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main subject of this book.

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While it is true that things work as they are now, they could

P M
work even better with a little help from new our friend, heikin-

O
ashi.

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Obviously then, this book is intended for readers who already

E L
have some familiarity with Japanese candlestick patterns and is not

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intended to teach readers how to use them in trading.

H I
Rather, the main objective of this book is to bring the

I G R
heikin-ashi technique to a wider audience and consider it

R E
vis-à-vis traditional candlestick patterns. There is no

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competition between the two; rather, there is a synergy.

P A
While traditional price candles appeal to the more artistic and

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subjective judgement (Right Brain people), heikin-ashi candles are

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a far more evident way to display trends and reversals, as shown in

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the figure below.

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For instance, consider this compare-and-contrast example for

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the monthly NASDAQ Composite Index (COMPQX). The upper

Y T
pane displays the index using Japanese candlesticks, and the lower

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pane shows a chart using heikin-ashi candles. Both representations

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cover the same period in a monthly time frame. The visual

E
difference is the striking clarity of the upward/downward trends

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and the consolidations introduced by heikin-ashi charting. The

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color changes with the trends, and doji-like candles with upper

P M
and lower shadows point to trend reversals. Series of heikin-ashi

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candles with both high and low shadows define periods of price

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consolidation. Turning points are sharper, and trend analysis

E L
improves.

T A
Furthermore, the very simple quantification makes the heikin-

H I
ashi technique attractive to those who tend to take a more analytical,

I G R
more precise approach (Left Brain people). In other words, heikin-

R E
ashi appeals to both sides of the brain in a complementary and

Y T
efficient way.

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Throughout this book we will use terminology like heikin-ashi

O M
candles and modified candles to refer to candles on a heikin-ashi

C
chart. Doji-like candles are references to candles with smaller

D
bodies and upper and lower shadows.

T E L
The learning objectives of this book are intended to help you

IA
become more effective and efficient in analyzing markets and

H
making trading decisions. For instance:

IG E R
• You will learn how to trade better with a lot less time and

R T
effort.

P Y A
• You will learn how to reduce dependency on candlestick

M
O
patterns or how to use the two techniques together—and to

C D
your advantage.

E
• You will get a crash course in the heikin-ashi technique for

T
better trading and investing.

H A L
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• You will learn to quantify heikin-ashi candles, with direct and
improved impact on trends and reversals.

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• You will learn how to detect earlier indications of trend

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weakness and change.

YR T E
• You will review popular Japanese candlestick patterns and

A
learn how to easily translate them using only five simple

P
heikin-ashi rules.

CO M
• You will walk through examples and discussions on charts

D
using both traditional Japanese candlestick patterns and

E L
heikin-ashi candles and quantification.

H T
• You will see charts using heikin-ashi for different instruments

I A
G R
and time frames.

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• You will learn how to use heikin-ashi with technical indicators.

P Y A
• You will learn how heikin-ashi works with Ichimoku charts.

O M
• You will learn how heikin-ashi can be used to gauge market

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strength.

T E L
• You will get ideas to develop your own strategies based on

H IA
modified candles.

IG
This book consists of three major parts, each of which has

E R
been organized into short chapters for easy understanding and

R T
comprehension. Each chapter concludes with a “30-Second

Y A
Summary” that highlights key points.

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Part One offers a crash course by total immersion in heikin-

O M
ashi charting. At the end, you should understand the essential

C D
fundamentals of this technique.

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Chapter 1 defines what heikin-ashi is and is not. The second

T
chapter outlines the five simple rules to define modified candles

H L
and applies them on charts for quick understanding and use of

IG A
this technique. How are trends and consolidations identified on

I
any heikin-ashi chart using the new rules? Chapter 3 shows the

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technique.

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In Chapter 4 you are introduced to a novelty: quantification of

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the heikin-ashi candles. The two indicators defined in this chapter

E
are a complement to the visual side of the technique. The first

YR T
indicator, haDelta, is of leading nature, sometimes too nervous

A
and rough but easily smoothed with a moving average. The

P
benefits resulting from using haDelta singularly or together with

O M
other analysis tools are evident.

C D
Volume is considered by many a secondary variable used to

E
confirm a trend. Chapter 5 describes how heikin-ashi charts are

T L
used with this new dimension.

H A
Modified candles are a unique visual representation of trends

G I
and consolidations. In addition, there are other indicators used

I R
for trend analysis that quantify traditional price candles and their

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frequency. They offer another view of trends and turning points

Y A
on price charts. Chapter 6 discusses two very simple, yet powerful,

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relatives of heikin-ashi: Qstick and psychological line indicators.

O M
Before going to Part Two, it is time for a warm-up in Chapter

C
7 where we discuss some Japanese candlestick patterns vs. their

D
heikin-ashi translations.

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Part Two is the arena where traditional and modified candles

IA
meet mano a mano (hand to hand). We review popular Japanese

H
candlestick patterns and compare each of them with the heikin-

IG R
ashi technique in both formats, visual and quantifiable. You will see

R E
how time and money investment in Japanese candlestick patterns

Y T
is significantly reduced by simple heikin-ashi chart reading. The

P A
compare-and-contrast charts will easily convince you to add the

M
heikin-ashi technique to your trading and investment analysis tools.

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Chapters 8 through 20 look at 28 Japanese candlestick patterns

C D
used by most traders and discuss the challenges of using these

E
patterns. Although this book is not specifically about Japanese

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candlestick patterns, each of these chapters looks at candlestick

H L
pattern definitions, raises questions about their objectivity, and

IG I A
compares pattern expectations with heikin-ashi resulting signals.

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Most of the examples presented show the benefits brought by the

R E
heikin-ashi technique both as a visual tool and technical indicator.

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Before going further, we must reiterate that heikin-ashi

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complements interpretations of Japanese candlestick patterns.

E
Heikin-ashi helps to confirm, or not confirm, the expected

YR T
outcome on Japanese candlestick charts.

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Should heikin-ashi totally replace the traditional candlestick

P
analysis? Should it work together with what you already know

O M
and use in terms of candlestick knowledge? Is heikin-ashi a tool

C D
that saves you time and money, and improves your trading and

E
investing? Part Two ends with answers to these and other questions

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about using heikin-ashi.

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Part Three is where we marry heikin-ashi with other technical

G I
analysis tools. Averages are simple, yet powerful, tools for traders.

I R
Chapter 21 describes how to use modified candles with averages.

R T E
In Chapter 22 you see how heikin-ashi works in multiple time

Y A
frames. This is a powerful approach where the new technique is

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easily applicable, with better results. Use of time frames is very

O M
important; the correct approach is even better. Usually two time

C
frames are sufficient; three are best. Alignment of entry and exit

D
signals in two time frames is better than in one. The same results

T E L
apply and are expected in three time frames vs. two. More identical

IA
signals in two or three consecutive time frames generate safer and

H
better results, and the degree of confidence improves dramatically.

IG R
About forecasts Yogi Berra once said, “It is tough making

R E
predictions, especially about the future.” We take a calculated risk

Y T
here and discuss in Chapter 23 a simple method to compute the

P A
profile of the next heikin-ashi candle. Will it be white or black?

M
With all risks involved and accepted, an educated computation

O
about the immediate future is an advantage.

C D
Volatility is an important variable to deal with in any market and

E
time frame. The use of Bollinger bands with oscillators or ADX is

T
already a component of many strategies. In Chapter 24 you will see

H L
how volatility works with heikin-ashi charting. As a novelty for many

IG I A
traders, we will discuss the use of the z-score indicator with heikin-

R
ashi. Why z-score? It improves the visual perception of the volatility.

R E
Chapter 25 looks at a popular indicator, Relative Strength Index

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(RSI), and its use with modified candles.

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The new, yet rather old, kid on the block in recent years is

IG R
Ichimoku charting. It is considered a complete trading system:

E
trend identification, trend strength, entry, stop-loss, trailing-stop,

YR T
and exit, except for bring-your-own money and risk management

A
strategy. Chapter 26 builds the foundation for a productive

P
partnership between the heikin-ashi technique and Ichimoku

O M
Cloud charts.

C D
Even at this early stage, the monthly heikin-ashi NASDAQ

E
chart shown previously in this section hints that this technique

T L
can be used to measure the strength of a market or sector. Chapter

H A
27 shows the steps to quantify the strength.

G I
Everyone loves turning points (pivots) and especially buying

I R
and selling at market sweet spots. There are many ways to define

R T E
stronger or weaker pivots. Chapter 28 shows how to associate price

Y A
pivots with heikin-ashi charting.

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Since the publication of my article about the heikin-ashi

O M
technique in Technical Analysis of Stocks & Commodities in February

C
2004, many FOREX traders started using this technique in its

D
original format or with modifications. Chapter 29 covers the use of

T E L
heikin-ashi as a visual and technical indicator for those interested

IA
in FX markets.

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The examples illustrated and discussed in this book are part of

IG R
the wide range of markets and techniques with which heikin-ashi

R E
can be used. By the end of this book, I hope that you, the trader or

Y T
investor, will seriously consider adopting modified candles. Be nice

P A
with them, and they will reward you.

M
I am convinced that the journey that follows will benefit you;

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the door to better trend trading and investing is open.

C D
Feedback is a powerful tool to improve products, services,

E
and trading results. Feel free to drop a message at ha@educofin.

T
com with questions, thoughts, or ideas about heikin-ashi. I am

H L
delighted to keep in touch. Great heikin-ashi trading!

Dan Valcu, CFTe

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